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Steve Saville Says the FED Is Inflating. He Says I Don't Know What I'm Talking About. Meanwhile, the CPI Is Flat and Gold Is Falling. He Conveniently Ignores Both of These Events.

Gary North
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April 2, 2008

My job is to help my paid subscribers make money. It is not to debate with new kids on the block. But I will make an exception in this case. I did not start this debate. I intend to finish it.

The gold bugs have told you that the FED has been rapidly inflating. For a year, I have said that it hasn't.

On April 1, Steve Saville went public with his essay insisting that I am all wet, that the FED is inflating.

On April 1, gold fell by 3%. His timing was unfortunate for his case against me.

I have debated publicly for 50 years. I am pretty good at it. I suggest this to anyone who ever sees a formal debate. When you see a debater use rhetoric to refute an opponent who has provided strong evidence for his case, and who also fails to mention the existence of this evidence, he usually loses the debate. When his opponent points out this omission in the first rebuttal, he surely loses the debate if he cannot answer this in the second rebuttal.

Let me show what Mr. Saville failed to mention.

A year ago, I provided detailed evidence proving that of the four definitions of money used by the FED (M1, M2, MZM, and M3), M1 was by far the most accurate predictor of the consumer price index. M2 predicted greater price inflation, M3 predicted much greater price inflation, and MZM was by far the worst. It predicted price inflation almost three times higher than what occurred.

In short, I looked at the statistical evidence and concluded that if you want to predict future price inflation, use M1.

Based on this analysis, I predicted the following at the end of the report:

With M-1 falling rapidly, this tells me that price inflation is remote. It could even go negative -- something we have not seen since 1955. This will produce downward pressure on long-term rates because of a reduced inflation premium in loans.

Accurate so far? I think so. In February, the CPI went flat: 0% growth over January. As for T-bond rates, the chart tells the story.

Mr. Saville attacked my recent article on the FED's policy of monetary deflation. He even included a link to it. You can read it here:

In that article, I included a link to my analysis of the four M's. Mr. Saville obviously did not bother to read my report. Instead, he used rhetoric to refute me.

As evidenced by the following charts, M1 -- a very narrow measure of money supply that tends to move in synch with the monetary base -- has essentially gone nowhere over the past three years, while MZM, a more comprehensive measure of liquid money supply within the economy, has experienced a parabolic increase. For some reason unknown to us, Mr. North is fixating on ultra-narrow monetary aggregates such as M1 while ignoring the broader, and more useful, measures of money supply.

Unknown reason, indeed. Here is my reason: If you use anything except M1 to predict the future movement of consumer prices, you will be wrong -- not a little wrong, but seriously wrong. If you use MZM, you will predict high price inflation that never arrives -- not in two decades of bad forecasts.

As I have mentioned, in February, the CPI went flat -- zero price inflation. Mr. Saville knew this when he wrote his essay. Presumably, so did his readers. He not only thinks I am ill-informed about monetary policy, he thinks his readers are ill-informed about the latest consumer price developments. Never treat your readers as if they were dolts.

This man is not skilled at public argumentation.

I don't know much about Mr. Saville. His on-line biography says he was trained as an electrical engineer. I find no books on either monetary theory or policy by him. I do know this: don't go up against an old guy who has spent over 40 years writing on a topic without doing your homework. If you do, you will get your head handed to you. In this case, it is the market that has handed Mr. Saville's head to him: a zero percent increase in the CPI and a crash in gold from $1,034 (intra-day) -- the day I ran an article on shorting gold -- to close at $884.

On February 26, he wrote this:

The current situation is similar to the final quarter of 2000 in that most gold stocks have become very under-valued relative to gold bullion and, as discussed in the latest Weekly Update, there is a potential catalyst for change in the form of a major upward trend reversal in the US yield-spread. The start of a large rally in gold stocks relative to gold bullion could still be a few months away, but the support structure for such a rally is in place. Therefore, investors should be getting increasingly OPTIMISTIC about the prospects for the gold sector.

There was not one word about the possibility of a major fall in bullion's price.

On March 12, he wrote:

On the assumption that one of our two potential scenarios is on the cards (there are, of course, other possibilities) it makes sense for investors/speculators with a timeframe of at least 6 months to currently have a sizeable long position in the gold sector. This is because there will either be large short-term gains leading to a good profit-taking opportunity by May, or there will be some short-term pain followed by a powerful multi-month advance leading to an even better profit-taking opportunity late this year.

As it has turned out, there were indeed "other possibilities," namely, that gold would fall like a stone. He should have paid closer attention to the other possibilities.

On March 18, I warned readers that gold would soon fall. On March 19, before the gold market opened, I begged them to sell some gold (not all of it). You can read what I wrote.

Here is my answer to Mr. Saville for March.

This is like a Western movie on the aging gunslinger and the kid -- in this case, the Australian Kid. The youngster wants to make his reputation by gunning down the old man. "I'm calling you out, North! You had better come out and face me! You've had your day! Now it's my turn. You hear me, North?"

You would think they would learn to leave me alone. They don't.

One way to avoid looking bad in an on-line debate is to examine the evidence carefully before you sit down at your keyboard to write. You must also select the correct evidence.

Mr. Saville did not select the correct evidence or even consider the correct evidence.

Mr. Saville treated me as if I were an ignoramus. The market has treated him even worse.

If he chooses to continue this debate, he has two options: (1) include a link to this article, which will cost him greatly; (2) try to debate without linking to it, which will be an admission that he got in way over his head and cannot get out. ("When you're in a hole, stop digging.")

Either is fine with me.

Of course, he can wait until gold rebounds above $1,000 and the CPI goes back to 4% a year. Then he can try to refute me. But, until then, he would be wise to remain discreetly silent. Too bad for him that his attempted refutation is already all over the Web.

Follow-up, April 3

See this article by Mises Institute scholar Frank Shostak:

See also this report:

See also this analysis:

Follow-up, April 4

Prof. Robert Murphy reports on falling bank reserves (deflation):

Follow-up, April 18

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